Discussion:Real Estate in S corp
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Discussion Forum Index --> Tax Questions --> Real Estate in S corp
Bottom Line (talk|edits) said: | 9 April 2007 |
| I know this has been discussed numerous times but I'm having problems getting it through my thick skull. From this forum I'm learned that real estate should never be held in a corp but am looking for bullet points as to why not. Example: Scorp (one stockholder) owns a house which is rented. Even after depreciation, there is a profit which flows through to line 17 of 1040. Why is this a bad situation? It's late in tax season and my brain is fried. | |
| 9 April 2007 | |
| just trust us on this one BL
can't get it out without paying tax can't keep it and sell corp without paying tax to get your own stuff you have to pay tax | |
| 9 April 2007 | |
| also, if S corp owns rental, where is salary to officer who does S corp work of collecting rent? | |
Bottom Line (talk|edits) said: | 9 April 2007 |
| Client wants explanation. The salary thing I understand. The other part I'm confused by. Say she bought the house for $50,000 and sells it for $75,000, the profit is $25,000. Her basis in the s is $50,000 because that's what she paid for the house. Therefore she would show $25,000 on her 1040 as either a capital gain or on line 17. Correct? What other tax would be due? | |
| 9 April 2007 | |
| Say she doesn't sell it, but closes down the S corp, keeps the real estate. Bld is worth 75,000, $10,000 accum deprec, adj basis = $40,000. Now what is the tax? Remember, she didn't sell anything. | |
| 9 April 2007 | |
| BL...since real estate is generally an appreciating asset, you cant get it out of the corp without paying tax...if she sells it, no problem with the S corp...but, as Kevin and JR1 pointed out above, if she wants it our of the corporation without selling it she has to pay tax to do so. | |
Bottom Line (talk|edits) said: | 9 April 2007 |
| I hadn't included depreciation in the above for ease of discussion. I see where depreciation would lower the basis in the RE. So if she shuts down the scorp but keeps the RE, her basis would be lowered to the basis in the RE. Does that mean that as long as she owns the RE, she needs to keep the Scorp? Then she'll be ok? | |
| 9 April 2007 | |
| if she shuts down the S corp there is a deemed sale of the property at FMV with attendant gains...but she gets fmv basis in property | |
| 9 April 2007 | |
| at some point she will need to pay a salary to whoever is collecting the rent for the corp and whoever is managing the corp's assets. Why convert passive income into ordinary income subject to SS tax??? And have to file W-2s, 941s, 940s, SUTA, etc? Or is she an engineer and just love paperwork and details??? It already sounds like she is, or she wouldn't be questioning you so much. Give her enough rope to hang herself if she won't listen to you. | |
Bottom Line (talk|edits) said: | 9 April 2007 |
| Actually she's a good client. She wants to understand the reasons and doesn't like "because I said so" explanations. Which is ok, I don't either. This is good and now we both understand. Tough to get things through the fog of late tax season. Thanks guys! | |
| 10 April 2007 | |
| Most of my clients also want the detailed explanations. Also tell her that when she dies, if she still has the property, stock will receive a step-up in basis. Assets held in the corp do not. In other words, you miss out on that free step-up that eliminates the taxable income on sale and gets rid of the depreciation recapture. But consider asking her this question: why does she want it in the S corp? What is she trying to accomplish? Liability protection? Easily done w/o the problems w/ LLC. What else? | |
Bottom Line (talk|edits) said: | 10 April 2007 |
| Liability protection is it. | |
| 10 April 2007 | |
| BTW, I am the same also. If someone tells me "because I said so" I just move right along. If I'm in a good mood I don't tell them where to get off first. But no one says "because I said so" twice to me. | |
Southparkcpa (talk|edits) said: | 10 April 2007 |
| Don't forget a very simple point to that clients get quickly.
1. If you take out an equity line on the real estate, the cash , if taken from the corp is a dividend OR income | |
| 10 April 2007 | |
| Matt, this is news to me. Can you elaborate? If s-corp shareholder borrows against the real estate, makes a distribution to self, he has income even if he has basis? I know there are some nasty interest expense rules, but am not aware of income on that distribution. | |
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